Study: Rentals in Houses Outnumber Those in Towers

Here’s a fun fact about the housing market: There are more rentals in houses than apartment buildings.

That number comes from CoreLogic economist Sam Khater, who crunched Census numbers to determine that about 20.7 million rentals are in 1-to-4 unit homes, including both detached and attached homes, compared with about 17.1 million rentals in buildings with 5-or-more units. About 1.87 million American households are in mobile homes, RVs, boats, or vans.

And according to Mr. Khater, those numbers are likely to skew even further in the coming years towards more people renting houses rather than moving to apartment buildings. The Journal reported last year that the country’s home-ownership rate fell in the first decade of the 21st century by the largest amount since the Great Depression, to 65.1%. As more Americans lose their homes to foreclosure, the majority of them will remain in single-family homes as renters, according to a Federal Reserve Board study from last year by Raven Molloy and Hui Shan. (Houses with one-to-four units are called “single-family” even though more than one family may live there.)

“Multifamily construction really boomed in the ‘70s and ‘80s, and single family boomed in the last decade, but that was mostly for owners,” Mr. Khater said. “I do think single-family rentals have been around 50% of the rental market for a while now, but the pendulum has definitely swung towards that part of the market, especially in the hardest-hit areas.”

So why is this important? Well, for investors, it’s the talk of the town. For most of the last year, Wall Street, as well as the real estate investors on Main Street, have been abuzz with speculation about the single-family rental market and the opportunity it holds.

Since the foreclosure crisis took hold, flooding the market with millions of cheap homes, hedge funds have been mining the distressed market for rental opportunities, teaming up with local property managers to buy thousands of foreclosed homes at courthouse auctions and more recently, from Fannie Mae, with the hope of generating double-digit investment returns.

The main hurdle facing Wall Street, however, is how to make single-family rentals behave like stocks, bonds and other tradable securities. Unlike apartment companies, which can be concentrate apartments into buildings with hundreds of units and build them in cities with dozens of apartment towers nearby, thereby making it easy to sign leases, fix plumbing, bill tenants for heating and maintain a pool or a gym, single-family home landlords have complicated jobs. Homes might be miles, or hundreds of miles apart, requiring dozens of employees to maintain and manage them, with little assurance that the homes will appreciate in value enough to make all that investment worth it.

Homes are also relatively illiquid investments, making them less attractive to investors who are used to buying and selling hundreds or thousands of securities at a time.

“It’s much harder to scale up the model with single-family rental,” Mr. Khater says. “But the interest in that is changing.”

That’s because prices in many markets are either at or near bottom, and with between 1.6 million and 10.3 million more homes at risk of foreclosure, prices have fallen low enough that investors are willing to take the plunge and deal with the headaches of backed-up toilets or rotting roof tiles in exchange for investment returns that beat Treasury yields by a long shot. Mr. Khater estimates in his paper from earlier this month that single-family rental is a $3 trillion market, and with average yields at about 8.6%, what large investor wouldn’t want to take a few chances?